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Pre-Qualification vs. Pre-Approval: The Facts

Pre-Qualification vs. Pre-Approval:  What’s the Difference?

If the difference sounds arbitrary, let me shed some light on an issue of semantics.  Shopping for homes these days requires a lot more than just “good faith.”  Agents and home sellers want to see that you’re not only willing but also able to buy their home.  So, to present a strong offer, buyers must know the difference between a pre-qualification vs. a pre-approval.

Understanding the important differences between the Pre-Qualification vs. Pre-Approval is vital to your home shopping experience. Know the difference!

Understanding the important differences between the Pre-Qualification vs. Pre-Approval is vital to your home shopping experience. Know the difference!

News to Spark the Discussion

Earlier, this week Freddie Mac removed the price tag from it’s automated underwriting system, Loan Prospector!  Loan Prospector is an automated underwriting system used by lenders to produce a risk assessment of a home loan applicant.  Like it’s counterpart, Desktop Underwriter, Loan Prospector is used to generate pre-approval letters for home shoppers.  Though the free use of Freddie’s decision engine is not likely to affect buyers directly, it has certainly renewed the pre-qualification vs. pre-approval discussion.

What Buyers Need to Know

A pre-qualification is a lender’s estimate of how much you could be eligible to borrow based on information you supply and it does not mean you will get the loan.  Typically, the pre-qualification is used to provide buyers a baseline.  It’s also generally issued with a list of documentation still needed to complete and/or verify the mortgage review.

A pre-approval usually means that the lender is ready to make you a mortgage loan based on the information and documentation you provided at the time you requested a pre-approval. The pre-approval will say how long it is valid for and may contain some other conditions for you to get the loan. Your lender may not require that you pay any fees except the cost of a credit report at this time.

Pre-Qualification vs. Pre-Approval: Beware of Pitfalls

Unfortunately, errors in data entry and/or incomplete information can produce inaccurate approvals/denials.  That’s why it’s important to work with a solid lender.  To avoid misguided decisions:

  • The Consumer Financial Protection Bureau has helped to define the difference between Pre-Qualification vs.  Pre-Approval.  If you are shopping for a home, be sure that you are preapproved.  If you are unsure, I can provide a second-approvals have created an “insurance policy” for their financing.  It’s a good idea to consider. 
  • Mortgage reviews should always consist of more than just a “automated underwriting decision.”  Financials should always be included in the pre-approval package.
  • Using multiple underwriting systems despite cost is a must.  At PrimeLending, the benefit always outweighs the cost.  Fortunately, this is a cost the lender will likely carry. 
  • Solid pre-approvals will almost ALWAYS equate to quicker turn times, on-time or early closings and much less “transactional” stress.

For more information regarding pre-qualification vs. pre-approval, contact me!

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